Risks associated with medium-sized construction contracts in Africa under FIDIC IV Conditions of Contract

In this article Chris Binnington discusses construction risks associated with the use of FIDIC IV (red book) Conditions of Contract in Africa on medium-sized projects (up to US$60- million), and he suggests some improvements that could be considered.

For international contracts involving substantial civil elements the FIDIC Forms of Contract in particular FIDIC IV (red book) are regularly specified. South African contractors in international markets will regularly encounter this document.

Introduction

There are some specific risks which must be considered when bidding for projects in certain countries in Africa:

  • political instability, sometimes followed by violence;
  • difficulties of communication;
  • low standard level of contract administration;
  • budgets for design, supervision and construction of the projects are often inadequate;
  • insufficient responsibility, authority and sometimes competence of the site representatives for an early settlement of disputes; and
  • delayed processing of payments by the funding agencies.

The views of the contractor that designs and builds a project, particularly when the contractor is a large organisation, are often different from the views of the con tractor involved in medium-sized con tracts, awarded in accordance with inter national competitive bidding procedures. The design and build contractor generally has a strong financial back up, an efficient contract administration department, experienced executives, in-house claim consultants and legal professionals. If and when serious contractual problems arise and protracted disputes or lengthy negotiations take place with the owner/employer, the large contractor generally can man age to execute the works, even with cash flow difficulties, and complete the project. Under the same circumstances the medium size contractor, as a first priority, has to resolve his cash flow problem with the bank manager. Not an easy negotiation, especially when the work is being conducted in a weak currency area, or a country politically unstable, as is often found in African countries. Such a situation usually affects the execution and timely completion of the works and invariably induces an unnecessary loss and expense to the contractor.

Construction by its very nature induces risks which are shared between the employer and the contractor. It is generally acknowledged that construction risks should be borne by the party best positioned to manage the risk in order to minimise cost and programme delay if the risk occurs. How risk is apportioned is to a large extent a function of the Conditions of Contract. Few contract forms are drafted with the express intention of minimising risk, but rather with the intention of allocating risk to the contracting parties. The FIDIC IV form of contract, which is used for the majority of projects in Africa, seems to offer various positive changes in comparison to the former edition and contributes to a better understanding and management of the contract process.

FIDIC III — FIDIC IV changes

Although FIDIC IV was published in 1987 it will be useful to briefly overview the major improvements as compared to FIDIC III, and thereafter to highlight some suggestions as to how additional improvements might be incorporated for the benefit of the both the employer and the contractor.

FIDIC IV has seen an improvement of risk allocation in the following specific areas:

Clause 2: The engineer’s duties have been more clearly spelt out and his obligation to act impartially is expressly stated.
Clause 10: The employer is required to notify the contractor stating the nature of the default, prior to calling up the performance security.
Clause 11: The contractor is deemed to have based his tender on the employer’s data.
Clause 12: Where adverse physical conditions arise, the engineer is required to consult with both the employer and the con tractor before determining any extension of time and the amount of any costs.
Clause 14: The engineer is required to give his consent to the programme; he no longer has to approve it.
Clause 20: Employer’s risks are clearly stated in respect of design of the works and the forces of nature.
Clause 42: Where there is a failure to give possession, the engineer is required to consult with the employer and the contractor before any extension of time or costs are determined.
Clause 51: Variations: the omissions must be genuine omissions and not for the purpose of depriving the contractor of the entitlement to carry out the work.
Clause 53: Claims: the importance of this aspect of the contractual relationship has been recognised and regulation of the claims procedure provided.
Clause 60: Payment: considerable detail is included in the express terms of the payment clause.
Clause 67: The dispute clause introduces fundamental changes to the dispute procedure, with the introduction of an amicable settlement procedure.
Clause 69: The right to suspend the work or to reduce the rate of work introduces an innovation which is of considerable benefit to contractors, where the employer is in default of payment.

Many employers continue to amend certain of the conditions so as to relieve themselves of the risk burden of many of the revised clauses, eg Clauses 11, 12, 44, 60 etc and have used the Conditions of Particular Application, Part II, or special provisions to make the contractor’s task of recourse more onerous and to adjust the balance of risk in their favour. Where amendments are made, the con tractor is advised to take extra care in not only assessing the clause involved, but also its possible affect on any other clause to which the amendment may relate.

Risk management

The amendments made to FIDIC IV have certainly clarified and apportioned the risk more precisely. In order to obtain the benefit from the changes, the requirements for the contractor to man age the risk within the framework of the extended clauses have been increased. On the assumption that the contractor has responsibly priced for the risk contemplated in the contract, his primary concern is to ensure that the predicted cash flow meets at least the total cost of achieving the necessary production to maintain the programme.

Whenever the cash flow projection is disrupted arising from the risk situation, critical evaluation of the contractor’s risk management may reveal weaknesses from the contractor’s or from the employer’s point of view. The contractual risks increase with lack of contract clarity, imperfect communication between the parties and poor contract administration. When the risk situation does not fall under the direct control of the contractor, he will usually be required to seek a decision of the engineer with regard to the situation which prevails. The relationship between the contractor and the engineer is usually the key to the success or the failure of the project in terms of timeous completion within the anticipated budget. The engineer must have confidence in the contractor’s ability to perform the work and the contractor must have confidence in the engineer’s ability to perform fairly and impartially.

Major areas of dispute

The following are potential areas of dispute.

  • unforeseen conditions;
  • valuation of variations;
  • extension of time for completion; and
  • disruption.

Other usual areas of dispute, indicated below, have a lesser impact on the performance of the project, since F1DIC IV conditions offer a clear understanding and risk allocation to the contracting par ties in respect of:

  • late drawings or instructions;
  • employer’s risks;
  • suspension of work;
  • possession of site;
  • notice and substantiation of claims;
  • measurement of the works;
  • time for payment of monthly certificates;
  • default of contractor;
  • special risks;
  • default of employer; and
  • price fluctuation.

Unforeseen conditions

The risk in respect of unforeseen ground conditions is one of the major risks in the performance of a project. Subsurface conditions (and that includes physical obstructions or physical conditions), which could not have been reasonably foreseen at the time of tender, geological faults, unforeseen water tables, springs, below surface structures and services, etc, represent the greatest unknown in the course of construction.

The employer, for budget reasons, could decide to limit the site investigation, supplying insufficient geotechnical information and disclaiming responsibility for the results.

The contractor on the other hand, in order to minimise subsequent disputes, believes that the employer should spend more time in the initial site investigation and design phase; should make available all site investigation information and should eliminate from the contract language any disclaimers on geotechnical data, soil borings and materials reports. This would reduce bid contingencies and litigation over alleged misrepresentation.

FIDIC Clause 11.1 deems the contractor to have based his tender on the documentation made available by the employer, on his interpretation of the same and his inspection and examination of the site. The contractor should satisfy him self as to the form and nature of the site and materials, including the subsurface conditions. However for practical reasons, limited time available and cost, the contractor generally accepts the view of the specialise who has prepared the site investigation and materials report.

Some of the latest forms of contract, the new engineering contract (cl 60.2) ENAA Model form of Contract (CC 35), EIC Turnkey Contract (Cl 4.4), qualify that in judging the physical conditions the con tractor is assumed to have taken into account (and therefore will be responsible for) information obtainable from a visual inspection of the site.

The standard contract documents of the American Institute of Architects utilise differing site conditions clauses, which assign the risk of unexpected subsurface conditions to the employer.

The contractor’s view would be that FIIJIC Clause 11 should be expanded and improved, by introducing the concept of visual inspection, and possibly introducing differing site conditions sub-clauses.

FIDIC Clause 12.2 provides that upon encountering adverse and unforeseeable conditions, notice should be given forth with. The engineer is required, after consultation with the employer and the con tractor, to determine any extension of time (Clause 44) and any costs which may have been and will be incurred, taking cognisance of the measures to be taken to meet with any proposal for rectification. Any assumption that the engineer can and should immediately make his determination is not practicable in so far as costs are concerned.

One of the difficulties in the administration of Clause 12 is the degree of probability that the contractor is required to foresee. It may well be argued that the degree of foreseeability should be judged by that of the engineer and his ability to be aware of the risk of the adverse physical obstructions of conditions as found.

For any contractor operating in Africa on the size of contracts under review, it is essential that, in the event of a Clause 12 occurrence, the following should be recognised and exercised forthwith: unforeseen conditions;

  • notification in writing to the engineer/employer;
  • advise as to the urgency and possible effects that may be anticipated, including measures intended to be taken to mitigate circumstances;
  • notify the anticipated delay in terms of Clause 44.1;
  • remind the engineer of the need for instructions as required;
  • keep a daily record of all attributable costs, possibly signed by the engineer’s representative, and make a photographic record where necessary.

A relaxation of the strict requirements of Clause 12.2 regarding immediate notice should be allowed in certain circumstances.

In a major dam and tunnelling project in the southern African region, cracking in the rock foundations was originally dealt with by the engineer with a variation order in terms of Clause 51; subsequently the cracking was extended by stress relieving and weathering, with a consequence of additional work being required on the rock foundation and delays to the project. Only much later and by the report of an international expert geologist, was the cracking identified as a Clause 12 situation. The contractor’s entitlement to recovery of additional loss and expense in terms of Clause 12 had been prejudiced by the terms of the Conditions of Particular Application, (notification), which did not allow a review of the circumstances as if it had been a Clause 12 situation from the outset.

Valuation of variations

Whenever design changes occur and variation orders are issued by the engineer, the contractor is at risk through the potential failure to agree the cost and the time consequences. Since the engineer is never fully independent and is the agent of the employer, there may be some degree of impartiality which can have a negative influence on the outcome of any situation submitted for decision.

Since failure to agree new rates and make payments only gives rise to rights and remedies once payment is certified, the contractor is effectively left with no recourse where no payment is made through a failure to certify or through an under certification. The remedies avail able to a contractor under Clause 67, where the contractor alleges under certification, are far too time consuming to be of any benefit to the contractor under such circumstances.

In order to reduce the sources of disagreement during the performance of the contract, it could be helpful to predetermine in the contract provisions and in annexure to the schedule of quantities the value of disputable items such as profit, site overheads, rates of labour and equipment, head office overheads, etc applicable to variation orders.

Clear provisions should be established with respect to variation orders procedures and payment on account procedures, in order to enable the engineer to pay the contractor for disputed items of work, during negotiations of the variation order.

In the event of the engineer’s failure to agree or to certify payment on account of any outstanding variation, the contractor should be entitled to compensation by way of appropriate financial charges.

This article is continued on this page.

THE CIVIL ENGINEERING CONTRACTOR JUNE 1997